Hi all, I intend to retire in about 4 years. I have had a Roth ira for quite some time. My problem is, that our last child is no longer a deduction for us, and it is difficult for my wife and I to have any meaningful deductions. Would it be wise/Legal, to open a Traditional IRA and contribute to that for my last 4 years to get at least some benefit from investing in my ira? Thank you , Mike.
I have had a Roth ira for quite some time. My problem is, that our last child is no longer a deduction for us, and it is difficult for my wife and I to have any meaningful deductions. Would it be wise/Legal, to open a Traditional IRA and contribute to that for my last 4 years to get at least some benefit from investing in my ira?
Note enough information to give you a specific recommendation, so I’ll just point out some general issues with your proposal:
Are you even eligible to deduct contributions to a Traditional IRA? if you or your spouse has a retirement plan available at work, the income limits for deducting T-IRA are more restrictive than the income limits to contribute to a Roth IRA. Check IRS Pub 590-A for the details on income limits for contributions https://www.irs.gov/pub/irs-pdf/p590a.pdf
Speaking of a workplace plan - do you have one available and are making contributions to that? If you make contributions to a Traditional plan at work, you can get a much larger reduction in your taxable income than making contributions to a T-IRA allows. Also, if you are eligible for an HSA, that’s another option for reducing your taxable income.
The thing about the “benefit” from deducting T-IRA contributions is that it’s a benefit for the year you make the contribution, but since it’s just a deferral, you are signing yourself up to pay taxes later. So you need to understand if you believe your income tax rates now are lower, higher or the same as your income tax rates in retirement will be. If you have a large Traditional account balance, or will be getting a pension, it’s quite possible that your tax rates in retirement will be higher, so any benefit you get now will be more than paid back by the higher taxes you would pay in retirement.
AJ
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Thank you very much! thats the kind of advice I need, I am looking into all those things you mentioned. Really appreciate your time. BTW, I dont have a work sponsored plan, Im self employed and have a self directed IRA using the Epic bundle from the fool.
BTW, I dont have a work sponsored plan, Im self employed and have a self directed IRA using the Epic bundle from the fool.
I would point out that as someone who is self-employed, you are eligible to open several different types of work-sponsored plans, including, but not limited to:
- Self-directed 401(k) (aka Solo 401(k))
- SEP IRA
- SIMPLE IRA
- SIMPLE 401(k)
All of these types of plans would allow you to contribute (and deduct) significantly more than the $6,000 ($7,000 if 50 or older) that you are limited to for a Traditional IRA.
AJ
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